Ch3: Employment Income

Question 1

Why do employees prefer being considered self-employed?

Answer 1

Self employed individuals can claim expenses that employees can’t.
Employee earns employment income.
Self employed earns business income.

Question 2

How does the CRA distinguish between an employee and a self-employed person?

Answer 2

• Control (they tell you how to do your work —> employee)
• Ownership of tools and equipment (they supply equipment —> employee)
• Ability to subcontract or hire assistants (not able to hire/replace you —> employee)
• Financial risk (no potential to lose money —> employee)
• Opportunity for profit (no opportunity for profit, does not include bonuses —> employee)

Question 3

How to report income from office or employment?

Answer 3

Report your salary, bonus, tips, commissions, when received (on a cash basis).
Earned = irrelevant, received = relevant.

Question 4

How to report bonus arrangements?

Answer 4

A business can accrue for a bonus and deduct it in the fiscal year accrued provided it pays for it by the 179th day of the fiscal year accrued. If the bonus is paid after 179 days of its FYE, employer can only deduct it when paid.

The employee only declares when received.

Question 5

What are the employee benefits (included in income, taxable)?

Answer 5

• Allowances for personal expenses
• Board and lodging (rent, groceries)
• Gifts in cash or kind
• Director’s fees (BOD meeting, directors get paid for coming to meeting)
• Holiday trips (spouse went shopping, include in income. Do not include yours, because you went for work)
• Tuition fees
• Financial counselling
• Non group sickness or accident insurance (aka non group disability insurance)
• Life insurance premiums (does not matter if group or non group)
• Forgiveness of employee loans
• Housing loss reimbursement

Question 6

Employee benefits: explain employee gifts

Answer 6

1. Gifts/awards: Christmas, wedding, birthday, etc.
   NOT taxable to employee.
   Max $500 in total per year, per employee for this category (including taxes). Excess is taxable.
   If cash or performance related awards —> Taxable.
2. Special achievement award: years service, minimum 5 years and every 5 years thereafter.
   NOT taxable to employee.
   Max $500 in total per, per employee for this category (including taxes). Excess is taxable.
   If cash or performance related awards —> Taxable.

For both:
- No cash allowed
- Gift certificate allowed if it cannot be converted to cash and is only for the stores appearing on the card (has to have name of the store).
- 2 separate categories. Cannot combine $ but can receive both in the same year.

Question 7

Employee benefits: explain tuition fees

Answer 7

Employee:

1. Specific: relates to your work, no taxable benefit.
2. General: indirectly relates to your work (e.g., stress management), no taxable benefit.
3. Personal: you work as an accountant and the employer pays for your cooking classes, taxable benefit.

Employer:

All deductible to employer, irrespective that it is or not a taxable benefit to the employee.

Question 8

Employee benefits: explain housing loss reimbursement

Answer 8

If your employer reimburses you for the loss on the sale of your home because of your work related move, the taxable benefit is calculated as follows:
(Amount reimbursed for loss - 15,000) x 50% = taxable benefit. WTF?
3 situations:
- Lost 40k, reimbursed 40k —> 40k
- Lost 60k, reimbursed 40k —> 40k
- Lost 40k, reimbursed 100k —> 40k, the other 60k all included in income.
If it doesn’t relate to an eligible move, the full amount is a taxable benefit.

Question 9

What are the non taxable employee benefits (exluded from income)?

Answer 9

• RPP Contributions by employer (company pension plan, if I contribute, deduction).
• Premiums on group disability insurance (disability/life: if I contribute, no deduction. However, when I received disability insurance, included in income, I can deduct money I contributed).
• Private Health care (dental, medical) (if government plan, taxable).
• Contributions to employee deferred profit sharing plans (I cannot contribute)
• Counselling (mental or physical health)
• Counselling (re-employment or retirement)
• Discounts on merchandise if not below cost (available to everyone, does not include big purchases such as houses, cars, yachts)
• Uniforms and special protective equipment (company logos, does not include e.g., suits)
• Subsidized meals if not below cost to employer
• Social events, if cost is less than $150 per employee, and available to all employees. If over $150, the whole amount is taxable.

Question 10

What are the two taxable car benefits from employer provided vehicles (bought or leased)?

Answer 10

1. Standby charge (benefit for the personal use of the car)
2. Operating cost benefit (benefit for the personal operating expenses of the car; gas, insurance, repairs, registration).

Question 11

What is the standby charge taxable benefit for bought vs leased vehicles?

Answer 11

Employer owns car: 2% x cost of car x months available

Employer leases car: 2/3 x (lease cost per month + taxes - insurance) x months available

• GST/HST/PST included in cost of car or lease payments.
• Cost of car: amount paid plus taxes (not value or book value).
• Period of availability: # of days available in year/30 (round off to whole number, round down if 0.5).

Question 12

What is the standby charge reduction taxable benefit?

Answer 12

Condition: if car is primarily (50% or more) employment usage.
Use this reduced standby charge: regular standby charge x (non-employment km / (1,667 x months available))

• Numerator cannot exceed 1,667 km per month ==> max 20,004 km.
• This means fraction cannot exceed 1.
• If fraction exceeds 1, no standby charge reduction.

Question 13

What are the operating costs taxable benefit?

Answer 13

Primarily personal usage: $0.33 per personal km

Primarily employment usage: Lesser than
1. $0.33 per personal km
2. 50% x SBC

Question 14

What are tax planning considerations for employer provided automobiles?

Answer 14

• The benefit also applies when you are sick or on vacation unless you are required to return the keys and vehicle.
• Keeps records to prove personal use.
• Consider leasing vs. Buying for lesser benefit.
• Minimize standby charge by using the car more than 50% for work.
• Avoid luxury cars, the greater the cost the greater the benefit.

Question 15

Define allowances vs reimbursements?

Answer 15

Allowance: an amount paid to an employee to cover some type of cost.
- usually gets included in income
- usually get a deduction

Reimbursements (based on actual costs):
- usually not included in income
- don’t get a deduction

Question 16

Define other allowances?

Answer 16

Taxable allowances:
- non-reasonable allowances (either got too much or too little)
- included in employee’s income
- employee can deduct actual costs (claim expenses)

Non-taxable allowances:
- reasonable allowances
- not included in employee’s income
- employee cannot deduct actual costs

Question 17

Define car allowances?

Answer 17

For employees (other than commissioned employees) automobile allowances to be considered reasonable, the allowance must be based on kilometres.
Upper limit (for 2022) (no benefit, no deduction):
- $0.68 for the first 5,000 km
- $0.62 for each additional km

Non-reasonable car allowances:
$0.20 / $1.00 per km —> include in income, can deduct car expenses.

Question 18

What is interest benefit from loan to employees?

Answer 18

General rules: imputed interest at prescribed rate (government interest may change quarterly).

Interest benefit = loan amount x prescribed interest rate x # months of loan outstanding in the year.

• If interest was paid on the loan during the year you would reduce the benefit above (you have up to 30 days of the following year to repay interest. If you pay after 30 days, you get no deduction). Assume you repaid $500 of interest on December 31, the benefit would be $1,083 - $500 = $583.
• If the loan was made for income producing purposes, you would get a deduction for the interest benefit (before the amount of interest repaid) $1,083.

Question 19

Define stock options for employees?

Answer 19

An option to buy shares at a specified price for a specified period of time.
- Provides incentive for employee performance.

Tax considerations — granting options:
- does not create a benefit for the employee
- does not provide a deduction for the employer

Question 20

Explain stock options when employer is a public company?

Answer 20

1. Granting (when offered): no benefit
2. Exercise (when you buy): employment income, 100 shares x (value $20 - cost $10) = $1,000 benefit.
3. When you sell: net income, taxable capital gain 100 shares x 1/2 x (POD $25 - ACB $20) = $250 benefit.

POD: proceeds of disposition (selling price)
ACB: adjusted cost base (cost + benefit)
Taxable capital gain: capital gain x 50%

Question 21

Explain stock options when employer is a CCPC?

Answer 21

1. Granting (when offered): no benefit
2. Exercise (when you buy): no benefit (calculate benefit but don’t include)
3. When you sell
   - employment income (benefit calculated when you bought in year 1 but reported when you sell in year 2). 100 shares x (value $20 - cost $10) = $1,000.
   - taxable capital gain: 1/2 x 100 shares x (POD $25 - ACB $20) = $250.
   - Net income $1,250.

Question 22

What are expenses employees can and cannot claim?

Answer 22

Expenses employees cannot claim:
- taxes withheld on your salary (deductions at source) (you apply it against your tax payable).
- EI and CPP premiums paid (you get a credit when calculating tax payable).
- Donations (you get a credit when calculating tax payable).

Expenses employees can claim:
- legal expenses to collect salaries or establish income rights (e.g., if employer does not want to pay salary, legal lawyer fees to collect salary and deductible).
- employee RPP contributions

Question 23

Deductions - ITA 8(1)(f): specific for commissioned sales people. What are the conditions to qualify for 8(1)(f)?

Answer 23

• required to pay expenses
• required to work away from the office
• paid at least in part by commissions
• if no allowance / if received unreasonable allowance
• employer signed form T2200 (confirms that all conditions are true)

If all conditions are met, can claim expenses.

Question 24

Types of expenses - ITA 8(1)(f): specific for commissioned sales people. What types of expenses can they claim?

Answer 24

• advertising and promotion (paid for name on billboard, business card)
• meals and entertainment when going away for work (50%, provided you were away for at least 12h from your municipality area)
• lodging
• parking
• licenses
• transportation (Uber, train)
• training costs (courses you’re taking)
• bonding, insurance, and medical fees
• computer and office equipment (if leased)
• property taxes and insurance on home (prorate based on square feet used for work office vs total square feet)
• motor vehicle costs (other than CCA and interest) based on work km vs total km
• 8(1)(f) expenses cannot exceed commission income.
  Example: under 8(1)(f) can claim 17k expenses. Assume commission income is 14k. Can only deduct 14k.

Question 25

Deductions - ITA 8(1)(h) Travel and ITA 8(1)(h.1) Motor vehicles: specific for other employees (not commissioned sales people). What are the conditions to qualify for 8(1)(h) & (h.1)?

Answer 25

• required to pay expenses
• required to work away from office
• if no allowance / if received unreasonable allowance
• employer signed form T2200

Question 26

Types of expenses - ITA 8(1)(h) & (h.1): specific for other employees. What types of expenses can they claim?

Answer 26

• meals and entertainment when going away for work (50%, provided you were away for at least 12h from your municipality area)
• lodging
• parking
• transportation (Uber, train)
• computer and office equipment (if leased)
• motor vehicle costs (other than CCA and interest) based on work km vs total km

Salesman can claim 8(1)(f) or 8(1)(h)(h.1). Their choice.
8(1)(h)(h.1) is not limited to commissions but cannot claim as many expenses.

Question 27

Types of expenses - ITA 8(1)(i): all employees, not restricted by commission. What types of expenses can they claim?

Answer 27

Can claim:
- union or professional dues
- office rent
- home office expenses
- salary to an assistant
- cost of supplies
- long distance calls and cellphone air time (cannot claim monthly cellphone fee)

Question 28

ITA 8(1)(i) Work space in home - home office expenses. What are the conditions to qualify for home office expenses? How to calculate?

Answer 28

• space is principal place of business, or
• space is used exclusively to produce income and it is used on a regular and continuous basis for meeting clients or customers

Electricity, light bulbs, fuel, cleaning materials, minor repairs.
Prorate expenses based on square footage used for work.
- if rent, claim based on square footage used for work
- you cannot create employment loss with home office expenses, but you can carry over the excess to future years.
- no CCA or mortgage interest on home allowed

Question 29

ITA 8(1)(j) - CCA and Interest Costs: all employees, not restricted to commission. What expenses can be deducted?

Answer 29

CCA (depreciation) can only be deducted on:
- automobiles (prorate based on work related km).

Can also claim interest costs to acquire a car based on work related km.